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Pricing Policy: Time Customization. I. Economic and Behavioral Foundations of Pricing. II. Power Pricing Concepts. Outline. Time customization of prices: The short term Trial and accelerate purchase Potential demand buildup Peak and off-peak pricing

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Pricing policy time customization l.jpg
Pricing Policy:Time Customization

  • I. Economic and Behavioral

  • Foundations of Pricing

    • II. Power Pricing Concepts


    Outline l.jpg
    Outline

    • Time customization of prices: The short term

      • Trial and accelerate purchase

      • Potential demand buildup

      • Peak and off-peak pricing

      • Demand probing and yield management

      • Potential negative consequences

    • The long-term dynamic effects


    Examples l.jpg
    Examples

    • Campbell offered trade deals to retailers during summer (a eight-week period)

    • Introductory offer on a new product

    • Varying airfares over time

    • Early bird specials

    • Hotels’ winter specials


    Basic motivations l.jpg
    Basic Motivations

    1. Trial

    2. Purchase

    Acceleration

    Not Time

    driven

    Known

    3. Potential Build-up

    4. Peak Load

    Time

    driven

    5. Peak Load withDemand Shift

    Information

    About Demand

    6. Demand probing

    Initially

    Limited

    7. Yield Management


    1 trial and 2 purchase acceleration l.jpg
    1. Trial and 2. Purchase Acceleration

    • On Saturday, 11/22, 1986, Ho Camera offered 5 rolls of Fuji film (24 exposures) at $15.98 less a $10 manufacturer’s mail-in rebate valid until 12/21, 1986.

    • The offer highlighted Fuji’s $5.98 “Final Cost After Rebate” or $1.20 per roll – approximately 60% less than the regular price.

    • The vast majority of consumers have been loyal to Kodak even though Consumer Reports citing virtually indistinguishable quality differences in their films.

    • Two goals:

      • To persuade consumers to switch and try Fuji

      • To accelerate purchase and “load pantry”


    1 trial and 2 purchase acceleration6 l.jpg
    1. Trial and 2. Purchase Acceleration

    • Two other mechanisms for enacting price customization:

      • Coupon

      • On-shelf price cut

    • These mechanisms differ in two important respects:

      • Reference price

      • Selectivity (areas, price-sensitive consumers, and Kodak consumers)


    Coupon redemption l.jpg
    Coupon redemption

    • A panel-level study of how shoppers redeem coupon when they purchase consumer packaged goods

    • Regular users are more likely to redeem coupons than previous nonusers

    • What is the motivation behind coupon offers?


    Purchase acceleration vs forward buying l.jpg
    Purchase Acceleration vs. Forward Buying

    Shipments

    Consumption

    DEC

    MAR

    JUN

    SEP

    How do you resolve this problem?


    Edlp versus hilo stores l.jpg
    EDLP versus HILO Stores

    • An examination of 3,000 common SKUs across 5 supermarkets (2 EDLPs and 3 HILO stores) (Ho, Tang, Bell, Management Science, 1998)

    • HILO stores have a higher price variance and a higher expected price

    • EDLP versus HILO stores

      • Number of trips

      • Average spending per trip


    Mean and standard deviation of basket prices l.jpg
    Mean and Standard Deviation of Basket Prices

    Tang, Bell, and Ho (California Management Review, 2002)



    3 potential buildup of low wtp customers l.jpg

    Price

    $60

    $40

    Time

    1

    4

    5

    6

    2

    3

    3. Potential Buildup of Low-WTP Customers

    • Mr. Coffee coffee maker (unit variable cost = $32)

    • The goal is to charge maximum WTP of a growing proportion of the market that would buy at regular price

    • Suppose customers for a coffee maker are of two types, one valuing the product at $60 and the other at $40.

    • Each group has a “birth” rate of 100 per month





    4 peak and off peak load pricing l.jpg
    4. Peak and Off-PeakLoad Pricing

    Peak

    Sales

    Volume

    Sales

    Volume

    Off-Peak

    100

    75

    50

    37.5

    $100

    $50

    $75

    $50

    $100

    $150


    5 peak load with demand shifts l.jpg
    5. Peak Load with Demand Shifts

    • If we charge $600 for both day flight and redeye, we receive $120,000 (leading to zero demand for redeye)

    • If we charge $1000 for day flight and $400 for redeye, we receive $140,000 (shifting the students’ demand to the redeye)


    Uncertain demand l.jpg
    Uncertain Demand

    • Consider selling a product to a single customer and three scenarios on information about a potential customer’s valuation of a product

      • You know she values the product at $5

      • You know she values it somewhere between $4.00 and $6.00

      • You know she values it somewhere between $0 and 10.00 (each value is equally likely)

    • Note the customer’s expected valuation is $5.00



    Optimal price variable cost 0 l.jpg
    Optimal Price (Variable Cost = 0)

    1.0

    1.0

    Prob.

    of a Sale

    Prob.

    of a Sale

    X

    Y

    $4

    $5

    $6

    $10

    $5


    Optimal two day sale pricing l.jpg
    Optimal Two-day Sale Pricing

    Unit variable cost =0

    1.0

    1.0

    Prob.

    of a Sale

    X

    Prob.

    of a Sale

    Y

    $10

    $10

    $5

    $3.33

    Day 2

    $6.67

    Day 1

    Charge $6.67 in Day 1 and $3.33 in Day 2

    Expected Revenue = 1/3 (6.67) + 1/3 (3.33)


    7 yield management l.jpg
    7. Yield Management

    • American Airlines pioneered the concept in the late 1970s

    • Leisure: Book well in advance, price oriented, and flexible on schedule

    • Business: Book on short notice, less price sensitive, and inflexible on schedule

    • Yield management system is to price and manage the availability of specific fare types over time as demand for a particular flight reveals itself

    • If bookings are above the norm, this is a signal to shut off availability of highly discounted fares


    Airline ym operations l.jpg

    inquiry

    transaction

    data

    Reservation

    System

    availability

    display

    YM System

    - forecasting

    - allocation

    implemented

    allocations

    Point of sale

    forecasts

    recommended allocations

    bid price

    YM Analyst

    - limited domain (O-D pair)

    - revenue performance incentive

    Airline YM Operations


    Basic ideas chicago sfo l.jpg
    Basic Ideas: Chicago  SFO

    • Based on initial forecasts, start with initial allocations (number of seats) for the two fare classes.

    • Adjust the allocations based on demand realizations.

    • For example, if the demand for Full Coach looks promising, “close” the allocation for Discount.

    • If later the demand is lower than expected, move allocations to Discount again.


    Examples what motivations l.jpg
    Examples: What motivations?

    • Campbell offered trade deals to retailers during summer (a eight-week period)

    • Introductory offer on a new product

    • Varying airfares over time

    • Early bird specials

    • Hotels’ winter specials


    Potential negative consequences l.jpg
    Potential Negative Consequences

    • Incremental or substitute sale (e.g., negligible increase in consumption)

    • Cost of customization (e.g., production and inventory costs)

    • System effect

      • Reference price effect

      • Wait for sale mentality

      • Fairness


    Long term dynamic effects l.jpg
    Long Term Dynamic Effects

    Current

    Period Price

    Price Response Curve

    Competitive

    Situation

    Current

    Sales Volume

    Current

    Contribution

    Current

    Cost

    Future Price

    Response Curve

    and Price/Profit

    Realization

    Future Cost

    Position


    Punch line l.jpg
    Punch-line

    • Clearly understand the underlying motivation

    • Design the time-customization plan based on the motivation

    • Consider the potential negative consequences and long-term dynamic effects


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